Property Rates and Reality Checks

Property insurance carrier after property insurance carrier is exclaiming that they need 20% here and 15% there and 18% over there. Rates in many parts of the country are already bordering on unaffordable, however. Agents in the field are concerned they will lose revenues because people simply won’t buy insurance from anyone. With 20% this year and 20% next year, people will be forced to make hard choices between buying insurance and forgoing other important parts of their life.

Let’s take a real-world example: a middle-class home in a PC 3 where the annual premium is already $7,000. The same home in more catastrophe prone areas has rates of $14,000 to $40,000. But $7,000 plus 20% this year and 20% next year equals $10,080. Assuming for a moment that carriers actually need that much rate, where is the consumer going to find another $3,000 for their homeowners insurance? Even for a couple making $100,000 annually, the total is 10% of their entire pre-tax income. Add in auto insurance and they are paying upwards of 15% of their income for insurance. That is not affordable.

Carriers are never going to see the 20% increase anyway. What happens when rates increase 20%? Again, in the real world and not the theoretical: People and their agents are going to shop those accounts infinitum. Then, insureds are going to buy less insurance. Whether they select higher deductibles or lower coverages, they will buy less insurance. Moreover, maybe the actuaries see it differently, but I’m not sure carriers gain much when insureds go to $5,000 or $10,000 deductibles. When a house burns or blows away, the loss is still massive and if the concern is about catastrophic storms, then the house blowing away or burning completely are the key concerns. And, the anger with our industry for not reducing rates much for a $10,000 deductible will fuel the politicians’ efforts to control the industry.

Additionally, and we’re already seeing this in places, people are simply foregoing insurance. If they don’t have a mortgage, they are not buying homeowners insurance. Getting 20% on no homes equals $0 premiums. Does that solve the problem?

Fitch Ratings wrote a paper recently, as published in Insurance Journal’s affiliate, Carrier Management, on Aug. 18, 2023, that rate hikes are not making auto carriers profitable, except for the two carriers growing most quickly. The exception is an important point. Those two carriers are growing so fast and simultaneously with profit margins of 10 to 15 full percentage points higher. This suggests the industry’s issues are not necessarily industry-wide issues.

Another reality no one is talking about is that many of the carriers losing money are horribly managed companies. The problem is internal and not a rate issue. When the focus is on adequate rates, the presumption is that the insurance carrier is well managed and the problems are simply of inflation, severity, and so forth. Many insurance companies are not managed well, and no amount of rate will fix that.

It’s like a bad risk. No amount of rate is adequate for a bad risk and no amount of rate fixes an incompetently managed insurance company.

To that point, the two carriers in the Fitch Ratings report that are extraordinarily profitable are also growing far faster than the industry. Often carriers that grow quickly are underpricing the market and outgrowing their surplus. These two carriers, based on my research, are not underpricing the market and neither are outgrowing their surplus.

Therefore, slowly but steadily, when the other carriers increase rates so much, they are accelerating their problems because the only insureds willing to pay so much are those who have no other choices. This is adverse selection. The better carriers are pulling in the better risks at elevated prices enabling them to grow profitability. They attract these insureds from all the other carriers so no one carrier immediately notices what is happening, not even for years. Slowly but surely then, the other carriers have a higher and higher concentration of marginal accounts. It’s a whirlpool that is difficult to escape, especially if the carrier has not maintained their surplus. This is why, even when rates increase so significantly, many companies’ loss ratios do not improve.

For some carriers, the reason premiums do not increase commensurately with rates is that their goal is to increase rates enough that business leaves. If a carrier is short of surplus and cannot obtain new capital, an alternative way to increase surplus is to lose premium. The amount of surplus required is correlated to the amount of premium lost. Therefore, cut premiums and the amount of surplus required is reduced. If a carrier doesn’t want to send out nonrenewals or pull out of a state entirely, how do they get consumers to leave? Increase rates substantially so customers shop.

If carriers cannot make money, after adjusting for management incompetency where applicable, at a decent loss ratio, then this industry needs to redesign the homeowners policy. The rates are soon to become unaffordable to a large portion of the public at the advertised rate increases. If the carrier remains in the market at those rates, people won’t buy insurance and if the carriers pull out of the market, insurance won’t be available for purchase.

That’s a bad result either way.

Two-Part Solution

There is an excellent two-part solution.

The first is to apply common sense underwriting. Buildings damaged in storms and/or likely to be damaged in storms are fairly easy to predict without any software or AI. That addresses adverse selection quite quickly. You may need to find an old-school underwriter to explain how common sense underwriting works and how to execute successfully, but it is not complicated.

Second, perhaps the homeowners policy needs to be redesigned and maybe it needs to be redesigned by territory. I don’t have access to granular level loss data, but it is safe to conclude a large portion of the increase in losses is due to wind. The hurricanes and the derechos in Iowa, Minnesota and South Dakota were huge loss events. Maybe a homeowners policy that addresses wind separately is required. Maybe a better national wind market needs to be developed. Many carriers might not like that if it means their premiums suddenly decrease by 15%. This might be a situation of being careful of getting what you wish for.

For the people claiming hurricane frequency is the issue, take a deep look at how the lull in hurricane activity caused carriers to rate property as if hurricanes were truly a thing of the past. Then, adjust for the huge population influx into storm prone areas as well as the plaintiff attorney issues. Considering these factors, the result is not the same as has been identified because it’s critical to distinguish between an increase in storms and an increase in storms that affect property because people have moved to storm prone areas.

Another consideration is to apply reasonable credits for better construction. For example, all the angst about hail claims and yet almost no carrier offers a discount for a hail proof roof.

I believe the industry has a great opportunity to provide the coverage customers need if we forego blanket coverage mindset and learn to not just say “no.”

The solution is not rocket science.